You must be used to receiving mails and messages telling you how your credit score is good and offering you a free report etc. This may become a thing of the past with RBI issuing an order restricting banks and NBFCs from providing access to credit information of consumers to unregulated entities, as per an Economic Times report.
This data is held by credit bureaus, which allow the banks to access them while evaluating loan applications. RBI has cited the Credit Information Companies (Regulation) Act, 2005 (CICRA) which may even invite penalties if violations occur.
Under the CICR Act, banks and NBFCs have to report details of every retail loan they sanction and disburse, to all the four credit bureaus. As a follow through, the repayment behaviour of the consumers will also have to be updated on a regular basis. Banks and NBFCs are mandated to keep the data in confidence.
The trouble starts when the banks and NBFCs outsource some part of their activities to
external agencies. These agencies are allowed access to the credit data and there is no permission obtained from the customers for accessing the information. The customers may have signed on the doted line giving the bank or the NBFC the right to access the data but that does not include the external agency, and this becomes a violation of the CICRA.
Many fintech startups have based their business models on such information and this order comes as bad news to them. Several instant loan-type of startups access this data to understand the past behaviour of an applicant.
The regulator has advised the banking institutions to respond to it with the details of the action they have initiated to stop this practice.
Interestingly, this is not a new practice but has been going on for many years now. It is said the matter came to RBI’s attention only now while auditing a bank. RBI is reported to have held a meeting with the leading rating agencies soon after sending the communication to the banks and NBFCs. Some of the agencies include TransUnion CIBIL, Equifax, Experian and CRIF High Mark.
As mentioned, there are a number of startups in the fintech space which receive applications for loans from individuals and based on the credit data accessed from the rating agencies, they would approve/reject the loan applications. If the access is stopped, they will have to revisit their basic business model itself.